The Morning Ledger: Businesses Bolster Internal Controls

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The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning. Send us tips, suggestions and complaints: david.hall@wsj.com. Get The Morning Ledger emailed to you each weekday morning by clicking here. Follow us on Twitter @CFOJournal.

Companies are bolstering their defenses against fraud. The push is part of a big overhaul of internal-controls guidelines that many companies expect to adopt by the end of the year, CFOJ’s Emily Chasan writes in today’s Marketplace section. Until now, internal controls have been based on a 20-year-old framework that doesn’t take into account new risks from mobile technology and cloud computing, as well as the rise of outsourcing and shifts in corporate governance.

The overhaul comes as internal controls are getting a tougher look from regulators. The PCAOB has increasingly rebuked auditors for failing to properly evaluate corporate controls, Chasan notes. Companies won’t face penalties if they don’t embrace the new guidelines, but ignoring them could put off investors who value tight management. The new framework recommends that internal-control processes adhere to 17 principles, such as the independence of corporate boards from management and the need to address risks posed by technology.

“Every company will be going through the processes they have and asking, ‘Do I have the right controls?’” said Carolyn Saint, vice president of internal audit for convenience-store operator 7-Eleven. “We’re making sure the things we’ve aligned to as company controls—like security, access, change management—are up to date, and whether there is anything in the new standard we need to reflect,” she said.

THE DAY AHEAD:

With worries rife about iPhone sales and margins, Apple’s fiscal-third-quarter results due today may be greeted with a wave of relief, writes Ahead of the Tape’s Spencer Jakab. That’s because the the bar has been sharply lowered. A year ago, analysts were calling for earnings per share of $12.02 for the period, but those forecasts have been falling steadily, recently reaching $7.34. The most important thing to watch will be product mix, specifically sales of iPhones and iPads. Investors will be hoping for more of the former.

Markets flash: Shanghai and Hong Kong led Asia higher on hopes that Chinese policy makers may roll out new stimulus measures. European shares are in positive territory and DJIA futures are also up.

EXCLUSIVE ON CFOJ:

Audit-rule exemptions pose risks. U.S. public companies exempt from a requirement that external auditors sign off on their internal controls far outnumber those that are covered by the rule. The exempted companies, which are generally small, are more likely to make financial restatements and errors, according to a GAO study. The report recommended that U.S. market regulators consider requiring companies to disclose whether they obtained auditor opinions on their internal controls, Emily Chasan notes. Critics of the internal-controls audit requirements have argued that it is too costly for small companies. But the GAO found that about 64% of the financial restatements between 2005 and 2011 came from exempt companies, and that exempt companies that voluntarily got auditor opinions tended to make fewer restatements.

What’s the matter with CEO pay? Executive compensation remains a hot-button topic, and the eye-popping numbers can make it seem like the situation is broken. But is it? The vast majority of companies pass their “Say on Pay” with ease, and experts say some of the moves to link executive pay to performance are working. Maxwell Murphy moderated a Spreecast panel for The Experts yesterday to find out what does and doesn’t need fixing. Video guests include James Barrall, a partner with law firm Latham & Watkins LLP who specializes in executive compensation and corporate governance; Steven Hall, a founder of executive-compensation consulting firm Steven Hall & Partners; and Alex Edmans, a visiting professor at London Business School on leave from the Wharton School of the University of Pennsylvania.

CORPORATE NEWS:

Former CFO takes top job at Time magazine unit.Time Warner named Joe Ripp, a former finance chief of Time Inc., as chief executive of the magazine unit after another former Time Inc. CFO, Michael Klingensmith, turned down the job, the WSJ reports. Mr. Klingensmith was seen a few weeks ago as a leading candidate, but he wanted to continue in his present job as CEO of Star Tribune. The magazine industry is grappling with a dropoff in print ad revenue, so Mr. Ripp will have to cut costs. In an interview, he promised to be “pragmatic,” saying he expecsd some cost cuts at the spun-off company but also plans to invest in growth areas. “I know the company has issues we have to deal with realistically,” he added. Meanwhile, Time Warner also named Time Inc.’s current CFO, Howard Averill, as its new CFO. He takes the reins from John Martin, who was appointed last week to run the Turner Broadcasting cable-networks unit.

Netflix posts strong profits, but subscriber growth disappoints.Netflix‘s profit soared as the video company added more Internet subscribers, domestically and abroad, the WSJ reports. But the subscriber gains weren’t enough to please investors, who sent share sliding 6.2% in after-hours trading, after they fell 1% in 4 p.m. trading. Analysts say that Reed Hastings, Netflix’s chief executive, and his colleagues are under pressure to prove that they can keep adding members to what feels more and more like a Netflix club, with insiders who can watch the service’s original shows and outsiders who can’t, the NYT says. In their quarterly letter to investors, Mr. Hastings and CFO David Wells said the company would be expanding to “include broadly appealing feature documentaries and stand-up comedy specials.” Mr. Hastings and Mr. Wells held a video discussion after the company reported its earnings. Watch the video conference call here.

McDonald’s CFO aims to boost sales with ‘suggestive selling.’McDonald’s Q2 earnings rose 3.7% as global same-store sales ticked higher, but both top- and bottom-line growth fell short of Wall Street views and margins shrank, the WSJ reports. CFO Pete Bensen said that, when the chain does consider raising prices in response to growing commodity and labor costs, it will try to remain in line with the modest inflation in supermarket food. He said McDonald’s also will try to expand sales by using more “suggestive selling strategies”—having employees ask customers at the counter or drive-through if they want to try a new menu item. Mr. Bensen also noted that several currencies weakened against the U.S. dollar during the quarter, Bloomberg notes. He said currency translation will negatively affect 2013 profit by seven cents to nine cents a share.

How tech companies stay offline on taxes.Reuters’s Tom Bergin takes a deep dive into corporate tax policy. An examination of hundreds of corporate filings across a dozen countries shows that proposed changes to rules on taxing multinationals threaten tax structures that are used by most of the big tech companies in the U.S. to shield tens of billions of dollars of income from taxes each year. The accounts of the 50 biggest U.S. tech companies and their subsidiaries show that only 13 declare the bulk of their income for tax in the main markets where they generate it, Bergin says. The rest use mechanisms to channel some or all of their revenues to a central tax base in a country with a lighter tax regime. Sixteen of the 20 biggest U.S. software companies by market value—including Microsoft, Adobe and Citrix, do not declare tax residences for their main businesses in their major European markets, their accounts show. Instead, they report software sales in Ireland, Switzerland and the Netherlands, countries that have smaller populations and offer lower corporate tax rates.

Michael Dell lobbies shareholders. Efforts to complete the sale of Dell have entered a new phase, as Michael Dell personally met with big shareholders and Dell’s board pitched small investors ahead of a rescheduled shareholder vote. Some people familiar with the thinking of investors and Dell’s board are anxious for the buyout group to publicly declare it won’t improve the sale terms, or go the other way and offer to sweeten the deal terms in some way, the WSJ reports. If Mr. Dell and Silver Lake were to take one of those two paths, they would need to make a decision by today or early Wednesday at the latest.

Loeb steps down from Yahoo’s board. Daniel Loeb is stepping down as a Yahoo board director, report the WSJ’s Saabira Chaudhuri and Benjamin Pimentel. Two other directors affiliated with Mr. Loeb’s Third Point have also submitted their resignations after the company agreed to repurchase 40 million shares owned by the investment fund. Mr. Loeb and Third Point launched a full-on attack on Yahoo management last year that led to the ousting of CEO Scott Thompson as well as much of the Yahoo board.

REGULATION:

SAC defends Cohen. SAC Capital Advisors fired back at the U.S. government, telling employees that the evidence shows Steven A. Cohen “did not even read” the email at the heart of allegations he failed to take proper steps to prevent insider trading at his hedge-fund firm, the WSJ reports. A 46-page “white paper” prepared by lawyers for Mr. Cohen responded point by point to the SEC’s civil-enforcement action Friday against Mr. Cohen. Securities regulators said he ignored “red flags” that should have alerted him to improper trading.

CFTC charges high-speed trader. The CFTC accused Panther Energy Trading and its owner, Michael J. Coscia, of disrupting markets by improperly placing trades allegedly designed to lure other investors into buying and selling futures contracts tied to corn, oil and other commodities at bogus price levels. The move is the latest sign of heightened global scrutiny of computerized trading across financial markets, the WSJ notes. In a related action, the U.K. Financial Conduct Authority fined Mr. Coscia for alleged deliberate manipulation of commodities markets.

CFO MOVES:

Corac Group, a collection of U.K.-based engineering companies, plans to separate the roles of chief financial officer and chief operating officer, previously both held by Mark Crawford, to reflect the increasing breadth of group business activities both in the U.K. and overseas. Mr. Crawford will continue as operating chief of Corac. Replacing him as CFO is Jon Carter, the former CFO of IPL Group Ltd., a privately owned IT-services company.

MTN Group Chief Financial Officer Nazir Patel resigned and was replaced by Brett Goschen amid an investigation at Africa’s largest wireless operator, Bloomberg reports. Mr. Patel “does not wish his continued employment with the company to prejudice the company in respect of certain allegations made against him, which are subject to an ongoing investigation which had been commissioned by the company,” MTN said in a statement. Mr. Patel was immediately replaced by Goschen, who was chief executive officer of MTN’s Nigeria unit and previously led Ghana operations.

Nearly across the board, mid-market executives are hiring new employees, buying new technology solutions, acquiring businesses to reach new markets and preparing IPOs, according to a Deloitte survey of more than 500 mid-market executives. But companies are running up against a number of constraints as they seek to expand, particularly in acquiring and retaining skilled talent.